Weekly Latin America Risk Monitor: Growth Remains Constrained

Conclusion: Both financial markets and economic data continue to paint a negative intermediate-term outlook for the Latin American region.

 

PRICES RULE

Latin American equity markets had another off week last week, closing down -2.4% on a median basis. Argentina, a market we remain the most bearish on, led decliners (-8.1% wk/wk) and is now down -28.3% for the YTD. Latin American equity markets are down -17.9% YTD on a median basis as economic stagflation erodes earnings and equity multiples to varying degrees throughout the region.

 

Latin American currencies also struggled against King Dollar last week, closing down -1% wk/wk on median basis. Brazil’s real and Chile’s peso led decliners, falling over -2% each.

 

Across Latin American sovereign debt and interest rate markets, we saw Brazil continue to get the benefit of the doubt on the rate cutting front: 2yr yields declined -11bps wk/wk; 9yr yields declined -12bps wk/wk; and 1yr O/S interest rate swaps tightened another -5bps to 9.95% – a full -155bps below the central bank’s target Selic rate! Other sovereign issuers, including Mexico and Colombia saw their local currency yields back up broadly across the curve last week.

 

5yr CDS traded wider across the entire region last week, finishing +10.6% wider on a median percentage basis. Mexico led gainers here, closing up +13.7% or +21bps wider wk/wk. Mexico, whose equity market continues to benefit from hopeful expectations out of the U.S., may be suggesting things aren’t as rosy north of the border as they are expected to appear – at least according to the credit market’s perspective. Mexican 5yr CDS has widened +55.6% in the YTD, which is right in line with the +56% median YTD move in the region.

 

THE LEAST YOU NEED TO KNOW

Growth Slowing:

  • Despite consumer credit growth running well beyond central bank targets in the YTD (up ~29%) Brazil’s central bank unwound the bulk of consumer credit curbs it imposed last December in what appears to be desperate effort to spur growth and “ward off recession” according to public rhetoric. Specifically, the measures reduced capital requirements for auto loans w/ maturities of less than 5yrs and maintained a 15% monthly minimum payment requirement on consumer loans that was scheduled to increase to 20% by EOY. The moves have marginally slowed down the rate at which traders expect the central bank to ease monetary policy, though further cuts are still being priced into various markets.
  • Brazil’s economic activity index, a proxy for GDP, slowed in Sept to +1.2% YoY vs. +2.9% prior.
  • Brazilian formal payrolls growth slowed in Oct to 126.1k vs. 209.1k.
  • Chilean real GDP growth slowed in 3Q11 to +4.8% YoY vs. +6.6% prior.
  • Peruvian real GDP growth slowed in Sept to +5.8% YoY vs. +7.5%.

King Dollar:

  • Chile’s central bank kept its benchmark interest rate on hold at 5.25% for the fifth straight month last week. The move comes as CPI accelerated to a 2-plus year high of +3.7%, which is pushing toward the outer limits of the central bank’s target band (3% +/- 100bps). The fact that they didn't raise rates signals to us that their "balance of risks analysis" is skewed towards eventually needing to take steps to preserve growth (i.e.: cut rates).
  • The yields on Argentina’s benchmark dollar-denominated bonds due in 2033 jumped +143bps to 13.67% amid growing speculation that the government’s efforts to support the peso will ultimately fail. Central bank reserves have fallen -12.2% to $46.2 billion amid dollar sales and a $5.7 billion allocation to service international debt. The government has taken extensive measures of late to combat capital outflows, which have forced benchmark deposit rates to 3yr highs and the highest level relative to interbank rates since 2003 (badlar = 20.6%; baibor = 12%). We’ve been quite bearish on Argentine equities, largely as a result of the long list of knock-on effects of a pending currency devaluation; email us for our aggregated work on this topic – not the least of which are higher borrowing costs leading to a deteriorating credit outlook. Fighting King Dollar’s bullish bid is not a battle we foresee the Argentines winning.

Counterpoints:

  • Mexican same-store sales growth accelerated in Oct to +5.8% YoY vs. +5.4% prior.

Darius Dale

Analyst

 

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